Cheap medicines, big impact
It’s the medicine that nearly 3 million New Zealanders take to relieve pain and fever and is considered by the World Health Organization to be an ‘essential medicine’.
But in the mid-1990s paracetamol was still a reasonably expensive drug in New Zealand, considering it was so commonly used and ‘off-patent’, which meant that generic versions of paracetamol were readily available.
Generic drugs have been key to PHARMAC’s buying strategy throughout its 25-year history. These are drugs that have the same chemical make-up as their brand name equivalents but are often much cheaper.
In some cases, the generic versions of paracetamol were nearly as expensive as the big name brands. In 1997 PHARMAC tried to change that by introducing a one-year experimental tender, inviting drug companies to bid to supply the New Zealand market with paracetamol.
“Paracetamol, it’s like aspirin, it has been around so long everybody knows it; there is just no debate about the quality of paracetamol from one company or another,” says Reinhard Pauls.
“We thought that the first tender we ran had to be something where there was just no argument.”
A negotiation began between PHARMAC and suppliers that saw them agree to reduce their prices for paracetamol by between 20 and 60 percent, if PHARMAC deferred tendering on 23 other medicines.
PHARMAC agreed and, in its first year, that one tender for paracetamol saw an overall price reduction of 44 percent, saving $18 million on buying the medicine. In the second year, $25 million was saved through the process.
“That had never been done in pharmaceuticals before,” says Pauls.
“You establish a precedent and then it gets rolled out.”
Within five years of PHARMAC introducing competitive tendering for pharmaceuticals, the generics market, previously dominated locally by two companies, had moved from being high-price, low-volume to low-price, high-volume.
Now the annual invitation to tender is integral to PHARMAC’s activity. Each year, PHARMAC invites pharmaceutical suppliers to provide pricing proposals for off-patent medicines listed on the Pharmaceutical Schedule.
Suppliers can bid for ‘sole-subsidised-supplier status’ through a blind tender process. Winning the tender comes with obvious benefits of market access at a preferential price, but the supplier must provide the ‘ex-manufacturer’ price for the pharmaceutical and prove it can offer adequate supply of it.
The tender process has proven successful. Nearly 2500 offers to supply pharmaceuticals were received in the 2017/18 tender round from 58 companies, and the number of suppliers participating in the tender continues to grow.
The focus of the tender has shifted over the years from being primarily about saving money to explicitly considering the suitability of medicines for patient use and prescribers and pharmacies to manage and dispense them. But the bottom line continues to improve thanks to this practice, with $40–50 million saved annually.
Number of suppliers that bid in the Tender - data
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Last updated: 13 September 2018